Wide ranging reforms to the European financial services industry took effect from 3 January this year with the implementation of the second Market in Financial Instruments Directive (Mifid II). The new rules are sufficiently vast and complex that it could take months or even years, before the changes are fully understood.
To recap, the legislation aims to provide greater protection for investors, raise transparency standards, reduce the risk of market abuse and make markets more efficient. One of the more immediately obvious and direct implications of Mifid II is that all firms – from asset managers through to advisers – will need to provide a great deal more information to the regulator and to investors.
What this means in practice
Some elements are well known and fairly clear. For instance, the requirement for asset managers to disclose all their costs raised the issue of how much is being spent on research. Asset managers needed to decide whether or not to absorb the cost themselves or continue charging investors, albeit perhaps more explicitly than before.
The absence of certain information and disclosures looked set to be a showstopper for those wanting to trade after the implementation of the directive. But even at the time of writing, the European Securities and Markets Authority (Esma), the EU’s supervisory authority, has introduced a last minute transitional period for certain aspects of disclosure, relating to transaction reporting. While this appears to add greater flexibility to the new rules, it creates additional complexity. Systems are already built based on what were the expected new reporting requirements and so may not necessarily accommodate the latest transitional arrangements.
- Mifid II came into effect 3 January and has many implications for financial advisers.
- Advisers must be aware of the 10 per cent rule for clients using DFMs.
- Firms are obliged to reveal all costs and charges.
While in some areas the demands of the legislation are clearly prescribed and specified it is likely to become increasingly evident over the coming months that there are several areas where more guidance will be required.
What to look out for
There are several issues where advisers may encounter different interpretations of the rules and inconsistency in the information they are given by providers and platforms. These include, for example:
● The 10 per cent notification rule
Clients who have assets managed under a discretionary mandate must be notified within 24 hours every time their portfolio falls by 10 per cent or more (and by 20 per cent, 30 per cent and so on) against the value in the most recent periodic valuation statement. Under Mifid II this will be quarterly rather than the current norm of half yearly.
But while ESMA has given guidance on the requirements, there are grey areas and are no means as closely defined as the regulation covering transaction reporting.
The main one surrounds the issue of who is responsible for providing the notification. The duty to report actually falls on the person exercising the discretion so discretionary fund managers (DFMs).
However, in most cases they will be unable to meet the requirements without assistance, simply because they are unlikely to know the client’s full circumstances or even their identity. It is only a client’s adviser who is likely to have all the detail.